USD/INR opens higher on receding US-China trade tensions
- The Indian Rupee opens on a weak note against the US Dollar around 88.90 as the Greenback gains on easing US-China trade tensions.
- US President Trump and Chinese leader Xi Jinping are set to meet in South Korea in late October.
- India’s retail inflation growth cooled down to 1.54% in September.
The Indian Rupee (INR) opens lower around 88.90 against the US Dollar (USD) on Tuesday, tracking overnight gains in the United States (US) currency, which came on the back of receding trade tensions between Washington and China.
At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, holds onto Monday’s gains near 99.25.
Trade tensions between the US and China started waning after Beijing confirmed that high-level talks between both nations are still going on, but accused Washington of adopting discriminatory policies and abusing export policies.
Meanwhile, US Treasury Secretary Scott Bessent has confirmed a meeting between President Donald Trump and Chinese leader Xi Jinping in South Korea in late October, with the aim of resolving issues regarding US chip technologies and rare earth controls.
"President Trump said that the tariffs would not go into effect until November 1. He will be meeting with Party Chair Xi in Korea. I believe that meeting will still be on," Bessent said in an interview with Fox Business Network on Monday, Reuters reported.
On the monetary policy front, investors await the speech from Federal Reserve (Fed) Chair Jerome Powell at the National Association for Business Economics (NABE) Annual Meeting in Philadelphia at 16:20 GMT. Investors would like to know the pace at which the Fed will continue loosening its monetary policy in the near term.
Daily digest market movers: Soft India’s retail inflation boosts RBI’s dovish bets
- The Indian Rupee is expected to remain under pressure amid firming expectations that the Reserve Bank of India (RBI) could cut the Repo Rate further in the last policy meeting of the year in December.
- RBI’s dovish bets have accelerated due to escalating fears of retail inflation undershooting the central bank’s tolerance band of 2%-6%. This is the second time in the last three months when the retail inflation has grown at an annual pace lower than 2%.
- On Monday, the Ministry of Statistics and Program Implementation reported that the retail inflation grew by 1.54% in September, the slowest growth in price pressures seen since June 2017. Economists had anticipated the inflation data to come in at 1.7%, lower than 2.07% in August.
- This year, the RBI has already reduced its Repo Rate by 100 basis points (bps) to 5.5%. In the June policy, the Indian central bank announced a bigger reduction in the repo rate by 50 bps, citing that it is front-loading rate cuts to boost the economy.
- Meanwhile, trade tensions between India and the US over New Delhi buying oil from Russia have been a major drag on the Indian Rupee. This has also kept overseas investors away from the Indian stock markets. However, a slowdown in the pace of foreign investors paring stake in Indian equities has been observed in the past few trading days.
- From October 7-10, FIIs turned out to be net buyers in Indian stock markets and invested Rs. 3,289.30 crores. However, they sold a stake worth Rs. 240.10 crores on Monday.
Technical Analysis: USD/INR holds near its all-time high around 89.00
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The Indian Rupee continues to hold its all-time low around 89.10 against the US Dollar for almost 20 days. The near-term trend of the pair remains bullish as the 20-day Exponential Moving Average (EMA) slopes higher around 88.71.
However, the 14-day Relative Strength Index (RSI) falls below the 60.00-80.00 range, suggesting that the bullish momentum is over for now.
Looking down, the pair could slide to near the September 12 high of 88.57 and the 20-day EMA.
On the upside, the pair could extend the rally towards the round figure of 90.00 if it breaks above the current all-time high of 89.12.
Indian Rupee FAQs
The Indian Rupee (INR) is one of the most sensitive currencies to external factors. The price of Crude Oil (the country is highly dependent on imported Oil), the value of the US Dollar – most trade is conducted in USD – and the level of foreign investment, are all influential. Direct intervention by the Reserve Bank of India (RBI) in FX markets to keep the exchange rate stable, as well as the level of interest rates set by the RBI, are further major influencing factors on the Rupee.
The Reserve Bank of India (RBI) actively intervenes in forex markets to maintain a stable exchange rate, to help facilitate trade. In addition, the RBI tries to maintain the inflation rate at its 4% target by adjusting interest rates. Higher interest rates usually strengthen the Rupee. This is due to the role of the ‘carry trade’ in which investors borrow in countries with lower interest rates so as to place their money in countries’ offering relatively higher interest rates and profit from the difference.
Macroeconomic factors that influence the value of the Rupee include inflation, interest rates, the economic growth rate (GDP), the balance of trade, and inflows from foreign investment. A higher growth rate can lead to more overseas investment, pushing up demand for the Rupee. A less negative balance of trade will eventually lead to a stronger Rupee. Higher interest rates, especially real rates (interest rates less inflation) are also positive for the Rupee. A risk-on environment can lead to greater inflows of Foreign Direct and Indirect Investment (FDI and FII), which also benefit the Rupee.
Higher inflation, particularly, if it is comparatively higher than India’s peers, is generally negative for the currency as it reflects devaluation through oversupply. Inflation also increases the cost of exports, leading to more Rupees being sold to purchase foreign imports, which is Rupee-negative. At the same time, higher inflation usually leads to the Reserve Bank of India (RBI) raising interest rates and this can be positive for the Rupee, due to increased demand from international investors. The opposite effect is true of lower inflation.
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